June 16 (Reuters) – The Bank of Japan raised interest rates to a 31-year high on Tuesday, marking another landmark step in normalising monetary policy as it focused on taming price pressures from the energy shock caused by the Iran war.
The hike was the first since December and aligns the BOJ with other central banks shifting towards tighter policy to combat inflation, including the European Central Bank.
Following are excerpts from Deputy Governor Shinichi Uchida’s comments at his post-meeting news conference, which was conducted in Japanese, as translated by Reuters:
BOJÂ SEES OIL SUPPLY UNCERTAINTY DESPITE U.S.-IRAN PROGRESS
“Compared with our previous meeting in April, the U.S. and Iran have signed a memorandum. That is a welcome move. Having said that, there is uncertainty on the pace of improvement in distribution (of oil).”
ON UPSIDE INFLATION RISKS
“Compared with the previous meeting, the risk of a sharp deterioration in the economy has diminished. On the other hand, price rises are broadening, and there is a risk that underlying inflation may deviate from our target.”
“With underlying inflation approaching 2%, it’s important to ensure we achieve our target stably.”
ON WAGE-PRICE DYNAMICS
“Wage growth is moving roughly in line with levels consistent with our price target. The mechanism by which wages and prices rise in tandem is becoming embedded.”
ON DISTANCE FROM NEUTRAL RATE
“Even our latest estimates are made in a very wide band, which makes it hard for us to use this in setting policy. We’ll have to gauge the neutral level by looking at how our rate hikes affect Japan’s financial environment.”
ON WEAK YEN
“We’re always watching currency moves closely. We don’t directly target exchange rates in guiding monetary policy. But we engage in monetary policy discussions on the view that currency moves have a crucial impact on economic and price developments. With companies’ wage- and price-setting behaviour becoming more active, the pass-through (of the weak yen) may have a bigger impact on underlying inflation.”Â
“It’s hard to judge now when our policy rate will achieve levels deemed neutral to the economy … Once we reach that level and financial conditions are no longer accommodative, we will guide monetary policy in a different approach.”
ON COORDINATION WITH GOVERNMENT
“Today’s decision was based on the need to address broadening price rises and the risk of underlying inflation deviating from our target. This would help Japan’s economy achieve sustainable growth and thus is consistent with what the government is doing.”
ON PACE OF FUTURE RATE HIKES
“We will look at economic, price and financial developments, particularly with an eye on the Middle East situation, for the time being. We’ll look at whether the economy and prices are moving in line with our forecasts, as well as risks. With underlying inflation approaching 2%, we need to be mindful of upward price risks. We will guide policy so that we won’t fall behind the curve.”
“The main difference between our previous meeting and this one is that downside risks to Japan’s economy have subsided significantly … Additionally, we have seen steady pass-through of costs in business-to-business prices, which led us to be more vigilant to inflation risks.”
ON U.S.-IRAN DEAL AFFECTING TIMING OF JAPAN STABLY HITTING BOJ PRICE TARGET
“That’s hard to say. We didn’t change our baseline view on the timing today. There are factors that could push forward the timing, and there are those that could delay the timing. How the de-escalation in the Middle East could affect Japan’s inflation outlook will be a key factor in judging future monetary policy.”
ON DECISION TO PAUSE BOND-BUYING TAPER
“Bond market function has improved significantly, so there was less need to keep tapering. On the other hand, the BOJ has diminished its presence in the bond market, so there was a need to give time for banks, individuals and other domestic investors to take our place. Even then, our balance sheet will be reduced at a sufficient pace.”
“We haven’t set in advance how long we will keep buying at 2 trillion yen per month. We believe the reasons we decided to pause our bond taper won’t change easily. But that could change depending on progress domestic investors make in adjusting their portfolios. We could change our plan in the future, while being mindful of the need to give markets predictability.”
ON BOJ’S BALANCE SHEET SIZE
“In the long term, there may be a time where we would debate the appropriate size and composition of our balance sheet … But the BOJ’s balance sheet is extremely large, and we are still in the phase of trying to slow our purchases without causing disruptions in the bond market. I must say it will be some time away.”
(Reporting by Leika Kihara; Editing by Harikrishnan Nair)
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